Bringing Darkness to Light: The Influence of Auditor Quality and Audit Committee Expertise on the Timeliness of Financial Statement Restatement Disclosures

Abstract

SUMMARY: This study investigates whether auditor quality and audit committee expertise are associated with improved financial reporting timeliness as measured by the duration of a financial statement restatement's ''dark period.'' The restatement dark period represents the length of time between a company's discovery that it will need to restate financial data and the subsequent disclosure of the restatement's effect on earnings. For a sample of dark restatements disclosed between 2004 and 2009, we find that companies that engage Big 4 auditors have shorter dark periods than companies that do not engage Big 4 auditors. We also find that companies with more financial experts on the audit committee have shorter dark periods, but only when such financial expertise relates specifically to accounting. Finally, companies with audit committee chairs that have accounting financial expertise provide the most timely disclosures, as the dark periods for these firms are reduced by approximately 38 percent. Our results suggest that both auditor and audit committee expertise are associated with the timely disclosure of restatement details.

Female Board Presence and the Likelihood of Financial Restatement

“…A substantial stream of research has addressed the causes and consequences of financial statement restatements (Kinney and McDaniel 1989;Dechow et al 1996;Hribar and Jenkins 2004;Kinney et al 2004;Desai et al 2006;Karpoff et al 2008;Plumlee and Yohn 2010;Schmidt and Wilkins 2011). Much of this literature has explored the role of the board of directors and the audit committee as financial reporting monitors (Baber et al 2010;Agrawal and Chadha 2005;Abbott et al 2004;Beasley 1996).…”

Audit committee chair and financial reporting timeliness: A focus on financial, experiential and monitoring expertise

“…Keeping in view the importance of the timely audited reports, in jurisdictions such as the UK, USA and Australia, there is a mandatory time period requirement for firms to provide audited financial statements to their shareholders and other key stakeholders (Behn, Sercy, & Woodroof, 2006;Doyle & Magilke, 2013;Schmidt & Wilkins, 2013;Sultana et al, 2015;Clatworthy and Peel, 2016). Moreover, recent regulatory changes in many countries (e.g.…”

Financial reporting failures, board's competency and effectiveness

“…Companies with fi nancial experts on the audit committee are less likely to have fi nancial reporting failures such as delay or restatement of fi nancial information ( Abbott et al , 2004 ;Zhang et al , 2007 ;Krishnan and Visvanathan, 2008 ), with similar results for Malaysia ( Ku Ismail and Abd Rahman, 2011 ). If there were restatements, companies with audit committee members and with fi nancial expertise take shorter time to disclose the restatement information, especially when the audit committee contains more accounting fi nancial expert, and the length of period for the disclosure is further reduced when the audit committee chair possesses the accounting fi nancial expertise ( Schmidt and Wilkins, 2011 ). There is also improvement in the quality of fi nancial reporting where there is a combination of legal and fi nancial expertise ( Krishnan et al , 2011 ), as well as a combination of independence and fi nancial expertise ( Felo and Solieri, 2009 ).…”